How Wall Street Defanged Dodd-Frank
Hall of Shame
Gary Gensler provides an interesting window onto the fight over Dodd-Frank’s implementation. These days, no one seems to doubt his commitment to seeing through what he started; the only question seems to be why his outlook changed so dramatically. Gensler shrugs when I ask what prompted his reversal. “We all evolve,” he says, readily acknowledging that he and his colleagues in Treasury made a terrible mistake back in 2000.
Gensler is a short, trim man with a twitchy energy that suggests a person in a hurry. Thanks to his slight frame, bald dome, goggling eyes and prodigious nose, some in town unkindly joke that he bears a passing resemblance to Mr. Burns in The Simpsons—but then he’s made plenty of enemies in town. “The banks view him as an apostate,” Dennis Kelleher says, “because they thought they were going to be able to count on him. He’s really their St. Paul.” There’s a fighter’s bounce to Gensler’s step, who is someone who clearly enjoys mixing it up. He works on the ninth floor of a nondescript office building ten blocks from the White House but almost never takes the elevator, even this past autumn while he was still recovering from a late-night fall in his bedroom that left him with a punctured lung and several cracked ribs. He’s a long-distance runner and has raised three daughters on his own since losing his wife to cancer in 2006. “The president asked me out of 300 million Americans to do this job,” he tells me. “I feel like the luckiest man in the world.”
He is also a man under siege. That much was obvious in the guided tour he gave me of what I came to see as a kind of Hall of Shame—a corridor near his office lined with framed photos of his predecessors. None still work at the CFTC, Gensler said, but it’s amazing how often he sees many of them. He nodded his chin toward a photo of Michael Dunn, his immediate predecessor as CFTC chair: Dunn now works for Patton Boggs, a lobbying giant whose clients include Goldman Sachs and Citigroup, two of the largest derivatives profiteers. The man in the next photo is Walter Lukken, acting chair of the CFTC for the final eighteen months of George W. Bush’s presidency. Lukken is “around all the time,” Gensler said, as president and CEO for the Futures Industry Association, which describes itself as “the only association representative of all organizations that have an interest in the listed derivatives markets.” Bush’s first CFTC chair, James Newsome, is co-founder of Delta Strategy, a lobbying firm that provides clients with “innovative solutions to their regulatory concern.” Citadel Investments and D.E. Shaw, two large hedge funds that invest in derivatives, are among those paying Newsome and his partner retainers of $120,000 and $160,000 a year, respectively. Jon Corzine’s old firm, MF Global, was good for another $110,000 in the two years leading up to its spectacular implosion in 2011.
Gensler pointed to another two recent commissioners. One resigned partway through a five-year term to join Patton Boggs and now runs his own lobbying shop; the other also took a job with the industry before he had finished his term. Gensler stepped back from the wall and counted: fully three-quarters of those who had served as CFTC commissioners over the past decade are among the noisy crowd of lobbyists beseeching him every day to soften the proposed derivatives rules, delay their implementation or simply chuck them out altogether.
The industry’s influence extends to the CFTC’s current commissioners as well. As chair of the CFTC, Gensler runs the day-to-day operations of the agency. But he’s still only one vote on a five-person commission that must decide on policy issues ranging from the small (within how many seconds does a registered derivatives dealer need to post the price a customer paid?) to the large (does Dodd-Frank require the CFTC to establish position limits, or can its commissioners choose to do nothing?). The commission is made up of three members from the president’s party and two from the opposition. One of the commission’s current Republican appointees worked as a staffer for one of financial reform’s most outspoken foes, Senator Mitch McConnell; the other previously served as a lobbyist for a swaps and derivatives trade association. Gensler could count on the vote of Bart “Quadrakill” Chilton, who once ripped into Goldman Sachs and Citigroup for duping their own customers, asking, “Did these guys go to school at Screw U?” But the commission’s third Democrat during the critical first fifteen months after Dodd-Frank passed was Michael Dunn, a regulator so industry-friendly that he would resign his seat in October 2011 and join the legions at Patton Boggs working to thwart Gensler’s efforts.
‘Slow Down, Deter, Impede’
So how does the quadrakill begin? With Congress, says Bart Chilton. For example, a lobbyist for one of the big trade groups will complain to a friendly ally in the House that the CFTC is moving too fast or ignoring its warnings. So then the treasury secretary receives a formal complaint signed by this or that House committee chair imploring him to intervene before Gensler inadvertently finalizes a rule that sends half the derivatives jobs overseas. Dodd-Frank expanded Gensler’s mandate exponentially: his agency is slated to go from monitoring $40 trillion in transactions each year to something closer to $300 trillion. And the very first bill Republicans introduced after taking over the House in the 2010 midterms—HR 1—was a measure that would have cut the CFTC’s funding by one-third. “Anything we can do to slow down, deter or impede their ability to engage in this oppressive overregulation,” Senator McConnell explained in 2011, “would be good for our country.” Congress has summoned Gensler to testify on Capitol Hill fifty-one times over the past four years—more than a visit per month since his February 2009 confirmation hearing.
Wall Street’s primary beachhead for fighting Dodd-Frank has been the House Committee on Financial Services, chaired until recently by the Wall Street–friendly Spencer Bachus. “Regulators are there to serve the banks”: that’s what Bachus, an Alabama Republican, said shortly after it was announced that he would replace Barney Frank as the committee’s new chair at the start of 2011. The Republicans have introduced dozens of Dodd-Frank-related bills, and almost all of them had been given a hearing in a Financial Services subcommittee. “Fundraising bills,” Mierzwinski calls them—legislation proposed, in his view, mainly to entice the industry to keep writing campaign checks to committee members. The bills that have consumer advocates feeling especially nervous are those being presented as benign changes to an overly complex law. They’re sold as technical fixes, Dennis Kelleher says, “but what they’re really about is creating loopholes big enough for the industry to drive a Mack truck through.” Financial Services and its various subcommittees held more than sixty-five hearings investigating various elements of Dodd-Frank in just the first two years after Republicans took control of the House.
You do for the industry, and the industry does for you. In 2012, Bachus fended off a primary challenge from his right and then faced his first Democratic challenger in more than a decade. The $2.7 million in campaign contributions he raised—more than ten times the combined take of his three opponents—allowed him to win easily. And more than a third of Bachus’s contributions came from the so-called FIRE industries (finance, insurance and real estate), which fall under his committee’s purview. The money also poured into Bachus’s political action committee, Growth and Prosperity—$2.5 million since 2007, according to OpenSecrets.org—which he, in turn, funneled back into the party and to his colleagues in the House. Yet the House leadership would replace Bachus after one term with Jeb Hensarling, a Texas Republican so hardline that he’s decided to ban the CFPB’s Richard Cordray from testifying before the committee because he questions the president’s right to have named him in the first place.